Cost of Kulluk Incident $90m and Rising

Friday, February 01 2013

Shell’s chief executives responded to questions about the January grounding of the Kulluk drill rig during the company’s annual results conference in London Thursday.

In a prepared presentation, Shell’s Chief Executive Officer, Peter Voser, played down the company’s many mishaps in Alaska last year.

“Despite making some progress we have run into problems in the last few months. Our rigs will need more work if they are going to be ready for the 2013 drilling season. One, the Noble Discoverer needs a series of upgrades, and the other, the Kulluk, ran aground in a heavy storm on New Year’s Eve and has been damaged.”

Voser reiterated that the company considers the Kulluk grounding a marine shipping incident, completely separate from its drilling operations in the Beaufort and Chukchi Seas. But he wouldn’t elaborate on whether the grounding could impact drilling plans for this summer. 

“We need to wait for the investigations, which some external bodies are doing, but which we are also doing internally, assess the risks and the learnings and then lay out our plans for the years to come.”

Voser emphasized that the company is viewing the grounding as learning opportunity.

“I cannot say what the learning is at this stage. But let me also say, and I know this is always dangerous to say because it will generate the headlines, but I have not seen in the world any business, not just the energy business, but all businesses -- they have risks at the end of the day. And you need to manage those risks, and we do it is as good as we can. We learn when it doesn’t work and we will manage these risks going forward. But I cannot say there will never be an incident -- that just isn’t going to work.”

Following up on that statement, Tim Webb, the energy editor at The Times in London, asked Voser if Shell was moving the rig from Unalaska to Seattle in order to evade Alaska’s oil and gas property tax.

“Assuming you say that’s true, because I think that came from Shell, would you say that’s an example of Shell not managing risks correctly, or making a poor decision in terms of managing risk in Alaska?"

In response, Voser denied that the decision to move the rig had anything to do with taxes, saying that the $5-6 million they would have had to pay is nothing in the grand scheme of things.

“There was a statement made by a Shell person, but in a completely different context, in a completely different meeting. That was then taken out of that context and then someone made a story out it. Just to be very clear on this one.”

The original story was written by Dutch Harbor Fisherman reporter Jim Paulin. In it, he quoted an email from Shell spokesperson Curtis Smith that was sent before the grounding. Paulin says he stands by his reporting.

“And I don’t think Shell would be backing away from that comment had it not gone aground. I think they would have been sending lobbyists to Juneau to try to repeal that tax. And I think that would be, in my opinion, the motivation for making that comment that it influenced their decision to move it."

If the company was moving the rig for tax purposes, the cost of the incident has definitely exceeded what they would have saved. Chief Financial Officer Simon Henry said they anticipate spending at least $90 million on the incident in the first quarter of 2013.

“The $40 million I mentioned is the pure salvage cost to salvage operators. The $50 million is everything else -- the Coast Guard, our own vessels etc.”

Henry added that those figures don’t include the cost of repairing the rig -- he said that information won’t be available until there are more details about the extent of the damage. 

The only information the Unified Command has released is that the rig is in sufficiently stable condition to remain anchored in Kiliuda Bay, on the south side of Kodiak Island.



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